Swiss finance sector told to ‘green’ up its act

Protests about the slow pace of greening Switzerland have gathered pace in recent years. © Keystone/ Valentin Flauraud

The Swiss financial centre has been put on notice to finally banish greenwashing. The finance ministry warns that legislation will be imposed next year if banks fail to keep their own houses in order with self-regulation.

The warning has been taken seriously. Swiss financial companies do not want to be burdened with European Union-style legislation. But NGOs and other pressure groups don’t trust banks to set their own rules for sustainable finance.

The number of global greenwashing cases in the financial industry rose by 70% last year, according to Swiss-based environmental, social and governance (ESG) data company RepRisk.

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“Greenwashing is a big issue. Criticism of companies that make promises they can’t keep is on the rise,” RepRisk CEO Philipp Aeby told SWI swissinfo.ch. “There is therefore an urgent need to restore credibility by tackling this problem. In Europe, for example, we are seeing signs of fatigue in the sustainable finance sector.”

Naming and shaming

Swiss financial firms have also been named and shamed. For example, the Swiss National Bank (SNB) was recently criticised by a coalition of NGOs for its fracking investments while insurer Swiss Re is accused of having issued policies to Brazilian farms that engaged in illegal deforestation.

The SNB says it constantly reviews its investment portfolio while Swiss Re says it takes sustainability matters seriously and is reviewing information relating to the historic Brazilian policies outlined in the NGO report.

Greenwashing and ‘Social Washing’ are terms used to describe companies failing to live up to their ESG pledges. In the financial world this can relate to three main areas: business dealings with third parties, such as issuing loans, investments in other companies or financial products that are sold to customers.

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Beyond the headline-grabbing cases of investing in ‘dirty’ companies lies the more subtle mismatch between financial performance goals and customer expectations.

Planet or profit

“Most investors expect ESG funds to contribute positively to society and not be harmful to the planet,” explains Aeby. “However, funds are often labelled as ESG based on assessments of whether certain company activities could have an adverse financial impact on the investor. These funds aim to optimise the risk-return profile for investors based on ESG factors.”

“While this is an important objective in its own right, it is crucial to convey it distinctly and avoid conflating it with funds designed to make a positive impact on both people and the planet.”

Switzerland has lofty ambitions to become a world leader in sustainable finance, fuelled in part by growing demand for ESG investments.

A recent Lucerne University of Applied Sciences and Arts study of the Swiss fund industry found sustainable funds attracting 91% of all new investor money between the middle of 2022 and the end of June this year.

Regulators and politicians are mindful of reputational damage for the Swiss financial sector if clients feel duped by ESG labeled investments. 

“The financial industry must accept the accusation that it sometimes markets the actual effectiveness of sustainable products with exaggerated performance promises,” stated German consultancy firm Zeb in a report this year focused on Switzerland. “Although Swiss banks want to rid themselves of this stigma through comprehensive self-regulation, it can be assumed that politicians […] will define stricter transparency requirements that are likely to go well beyond the proposals of domestic industry players.”

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Swiss legislators have already shown some appetite for laying down the law with the ‘Swiss Climate Scores’ ordinance. From the start of 2024, all large companies, including banks, must detail their climate-related financial risks and the impact of their business activities on the climate.

Toughening self-regulation

Pressure groups welcome the finance ministry’s recent threat of additional anti-greenwashing legislation by the end of next summer. “The financial industry is reacting far too slowly to the climate crisis. It relies primarily on voluntary measures – and has failed,” said Peter Haberstich, a sustainable finance expert at Greenpeace Switzerland.

The Swiss financial industry is desperate to retain its self-regulatory status, arguing that rigid legislation would stifle competitiveness. The sector is pulling out the stops to show legislators that self-regulation can prove effective.

To this end, the banking, asset management and insurance industries have compiled the self-regulated ‘Swiss Stewardship Code’. The Code’s nine principles include greater transparency, enhanced investor voting rights and mechanisms for resolving conflict between investors and financial service providers.

At the same time, the financial industry is also lobbying for less restrictive laws than in other countries. If self-regulation is abandoned, then second prize would be laws that lay down desired objectives (principles) rather than telling companies how to conduct their day-to-day business.

Bottling up with fear

The organisation Swiss Sustainable Finance, which represents the leading Swiss financial firms, believes such an approach would be beneficial.

“More far-reaching, principle-based rules for all areas of the financial sector would help protect investors and enhance the international competitiveness and reputation of the Swiss financial centre” it stated in a press release earlier this year.

Swiss banks crave as much self-regulation as possible but acknowledge that better regulatory clarity would be advantageous.

Some companies are already playing on the safe side to avoid their bold claims of sustainability being later exposed in public by NGOs.

Sustainable investments declined by 19% to CHF1.6 trillion ($1.8 trillion) last year. This was partly blamed on poorly performing financial markets. But Swiss Sustainable Finance also reported a “tighter definition of sustainable investments”.

The fear of being named and shamed in a greenwashing scandal has resulted in a worrying trend, according to RepRisk’s Philipp Aeby.

“Companies should certainly keep their promises. “On the other hand, it should not end in companies becoming so cautious that they no longer make promises.”